IAS 8 Handout - gimmenotesgimmenotes.co.za/wp-content/uploads/2016/12/FAC3701-su5-ias_8... · Title: IAS 8 Handout.pptx Author: Richard Starkey Created Date: 7/8/2014 4:37:44 AM

IAS 8 Accoun&ng Policies, Changes in Es&mates and Errors

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FAC3701-SU5-IAS 8-Summary Notes Copyright Tabaldi Education(Pty)Ltd

OVERVIEW – STANDARD ON A PAGE (SOAP)




IAS 8 Accoun&ng Policies, Changes in Accoun&ng Es&mates and Errors

Changes in accoun&ng es&mates

Disclosure •  Nature of change •  Reason for change

(IFRS or fair presenta&on)

•  Financial effect of change •  For each line item

affected

Accoun&ng policies

Selec&on and applica&on

Consistency

Changes in accoun&ng policies

Retrospec&vely adjust

Errors

-‐  Misapplica&on of policies -‐  Misinterpreta&on of facts (i.e., mistakes, fraud, oversight)

Material prior period errors

Retrospec&vely adjust

Disclosure •  Nature of error •  Financial effect of

error •  For each line item

affected

Prospec&vely adjust (year of change and future years only)

Disclosure •  Nature of change •  Financial effect

Cumula&ve catch up method

OR Spread method

Error in current year, correct in current year

(no disclosure)

3



OBJECTIVE AND SCOPE (READ ONLY) IAS 8 Accoun&ng Policies, Changes in Es&mates and Errors



Objec=ve

• Prescribes criteria for •  selec&ng and changing accoun&ng policies •  accoun&ng treatment of

•  changes in accoun&ng policies •  accoun&ng es&mates

•  errors

5

Enhances comparability over &me and with other en&&es



Scope

•  IAS 8 applies to •  Selec&ng and applying accoun&ng policies •  Accoun&ng for changes in

•  accoun&ng policies •  accoun&ng es&mates

•  Correc&on of prior period errors

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ACCOUNTING POLICIES THEORY IAS 8 Accoun&ng Policies, Changes in Es&mates and Errors



Selec=on and Applica=on of Accoun=ng Policies

8

When an IFRS specifically applies to a transac&on, event

or condi&on

Accoun&ng policy to be applied is

determined by the specific IFRS

For example, equipment is discussed in IAS 16 Property, Plant and Equipment,

∴ accoun&ng policy to be derived from IAS 16




• Hierarchy for selec&on of accoun&ng policies 1.  Standard and mandatory appendices 2.  Interpreta&ons 3.  Non-‐mandatory appendices (eg. Illustar&ve Examples) 4.  Implementa&on guidance 5.  Framework 6.  Pronouncements by other standard seXers with

similar framework

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•  In the absence of Standard or Interpreta&on •  Use judgment in developing and applying an accoun&ng policy that result in informa&on that is •  Relevant •  Reliable

•  Faithful representa&on •  Substance over form

•  Neutral •  Prudent •  complete

10



Consistency of Accoun=ng Policies

•  Select and apply accoun&ng policies consistently for similar transac&ons

•  If categorisa&on is permiXed or required -‐  Apply accoun&ng policy for each category consistently

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Changes in Accoun=ng Policies

• Only if •  Required by a standard or an interpreta&on •  Change results in the financial statements providing

•  reliable and •  more relevant informa&on

12

Fair presenta&on!




• Change in accoun&ng policy made on the adop&on of a Standard should be accounted for •  in accordance with specific transi&onal provisions in that Standard

•  if no transi&onal provisions ➨ retrospec(ve applica(on

• Voluntary change in accoun&ng policy should be applied retrospec&vely •  Early adop&on of new IFRS is not a voluntary change

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• Retrospec&ve Applica&on •  Adjust opening balance of

•  each affected component of equity for earliest prior period presented and

•  other compara&ve amounts disclosed for each period presented

•  As if new accoun&ng policy had always been applied •  If imprac&cable, restate prospec&vely from earliest date prac&cable

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Undue cost and effort



DISCLOSURES – CHANGES IN ACCOUNTING POLICIES




Changes in Accoun=ng Policies Significant Disclosures

•  Title of Standard •  State that made in accordance with the transi&onal provisions, if applicable •  Nature of the change •  Amount of adjustment for current and each prior period presented •  For each line item affected •  For basic and diluted earnings (if IAS 33 Earnings Per Share applicable)

•  Amount of adjustment related to periods prior to those presented

16

Not repeated in subsequent periods



Changes in Accoun=ng Policies Significant Disclosures

•  Standards issued but not yet effec&ve •  Disclose:

•  Such fact and •  Impact of adop&on on financial statements

•  Include in disclosure: •  Title of Standard •  Nature of impending change

•  Date by which applica&on is required •  Date on which en&ty plans to ini&ally apply

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Illustra=on (basic) – don’t worry about the maths yet

Current year Prior year 1 Prior year 2

Financial Posi7on

Decrease in asset (1,800) (1,500) (1,000)

Decrease in deferred tax liability 540 450 300

Net decrease in equity (1,260) (1,050) (700)

Opening effect on retained earnings (140)

(200 – tax 60)

Financial Performance (Profit or loss)

Decrease in revenue (300) (500) n/a

Decrease in tax expense 90 150 n/a

Net decrease in profit (210) (350) n/a

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CHANGE IN ACCOUNTING POLICY – INVENTORY VALUATION

IAS 8 Class Example



Change in Accoun=ng Policy Example

•  En&ty X Ltd decides to change its accoun&ng policy for inventory in 20X4 •  It previously applied the weighted average method •  It now applies the first in-‐first out method •  The change in inventory value will not be accepted retrospec&vely by the tax authority •  (that is the previously submiXed tax returns will NOT be re-‐opened).

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Example (Cont.)

20X4 CU

20X3 CU

20X2 CU

FIFO (new value) 10,000 9,300 6,000 Weighted Average (old value)

9,000 8,500 4,000

Difference 1,000 800 2,000

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•  Assume that the tax rate is 30%

Required: Prepare the journals and disclosure for the above change in accoun&ng policy.



Solu=on 20X4 20X3 20X2

FIFO (new) 10,000 9,300 6,000

WA (old) 9,000 8,500 4,000

Difference 1,000 800 2,000

22




• Before prior year (20X2)

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Dr Inventory (FP) Cr Retained earnings (Eq) Increase in inventory due to policy change

Dr Retained earnings (Eq) Cr Deferred tax (FP) Tax effect of increase in inventory

OR

Dr Retained earnings (Eq) Cr Current tax liability (FP) Tax effect of increase in inventory

If tax authority does not reopen

If tax authority does reopen




• Prior year (20X3)

24

Dr Inventory (FP) Cr Cost of sales (PL) Increase in inventory due to policy change

Dr Cost of sales (PL) Cr Inventory (FP) Reversal of prior year increase (inventory sold)




• Prior year (20X3)

25

Dr Deferred tax (PL) Cr Deferred tax (FP) Tax effect of increase in inventory

Dr Deferred tax (FP) Cr Deferred tax (PL) Tax effect of reversal (inventory sold)

OR Dr Current tax (PL) Cr Tax authority (FP) Tax effect of increase in inventory

Dr Tax authority (FP) Cr Current tax (PL) Tax effect of reversal (inventory sold)


If tax authority does reopen




• Current year (20X4)

26

Dr Inventory (FP) Cr Cost of sales (PL) Increase in inventory due to policy change

Dr Cost of sales (PL) Cr Inventory (FP) Reversal of prior year increase (inventory sold)

Dr Deferred tax (FP) Cr Deferred tax (PL) Tax effect of reversal (inventory sold)

Dr Current tax (PL) Cr Tax authority (FP) Tax effect of increase in inventory




Change in Accoun=ng Policy Inventory valua=on

•  Example disclosure 8.  During the year Co X Ltd decided to change the

accoun&ng policy for inventory from weighted average method to first in-‐first out method. This was done to more appropriately determine cost of inventory. The change in accoun&ng policy was accounted for retrospec&vely and compara&ve amounts have been restated accordingly. The effect of the change is as follows:

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Example disclosure (con=nued)

28

20X4 20X3 20X2

Statement of Profit or Loss CU CU CU

Decrease/(increase) in cost of sales 200 (1 200) n/a

Decrease/(increase) in income tax expense (60) 360 n/a

Increase/(decrease) in profit 140 (840) n/a

Statement of Financial Posi7on

Increase/(decrease) in inventory 1 000 800 2 000

Decrease/(increase) in deferred tax liability -‐ (240) (600)

Decrease/(increase) in current tax liability (300) -‐

Increase/(decrease) in equity 700 560 1 400




29

20X4 20X3 20X2


Decrease/(increase) in cost of sales 200 (1 200) n/a

Decrease/(increase) in income tax expense (60) 360 n/a

Increase/(decrease) in profit 140 (840) n/a


Increase/(decrease) in inventory 1 000 800 2 000

Decrease/(increase) in deferred tax liability -‐ (240) (600)

Decrease/(increase) in current tax liability (300) -‐

Increase/(decrease) in equity 700 560 1 400



ACCOUNTING ESTIMATES THEORY IAS 8 Accoun&ng Policies, Changes in Es&mates and Errors



Changes in Accoun=ng Es=mates

• Accoun&ng es&mates are required to prepare financial statements -‐  Bad debts -‐  Inventory obsolescence -‐  Fair values of financial assets and financial liabili&es -‐  Warranty obliga&ons -‐  Useful life of assets -‐  Change in deprecia&on method -‐  Change in residual value of asset -‐  Change in es&mated value of provision

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• Changes can occur as a result of •  Changes in circumstances and judgments used in es&mates and

•  Uncertain&es inherent in business ac&vi&es • Revision of es&mate does not apply to prior periods •  ∴not correc&on of error

•  When difficult to dis&nguish between change in accoun&ng policy and change in es&mate

•  Change is treated as change in accoun&ng es&mate

32




•  Effect of change is recognised prospec&vely •  included in profit or loss

•  In period of the change and •  Future periods (if change affects future periods)

•  If change affects asset, liability or equity •  Adjust carrying amount of asset, liability or equity in period of change

33



Changes in Accoun=ng Es=mates Significant Disclosures

• Nature of change • Amount of change •  If amount of effect in future period is not disclosed because es&ma&ng is imprac&cable •  Disclose such fact

34

which has effect in current or future period



ACCOUNTING POLICIES VS ACCOUNTING ESTIMATES

IAS 8 Class Example



Changes in Accoun=ng Policies vs Changes in Accoun=ng Es=mates

Scenario AE AP

1 •  Management of a hotel changed its strategic plans and as a result the rooms had to be refurbished within 2 years instead of 4.

•  Thus, period over which 7 year refurbishment is depreciated has decreased.

2 •  Co X decided to change calcula&on of its allowance for bad debts.

•  In prior years the calcula&on of the allowance for bad debts was based on fixed % mul&plied by total outstanding balance over 90 days.

•  Now, X calculates the allowance for bad debts on a review of individual balances.

3 •  Co B decides to change its valua&on of inventories from FIFO to weighted average.

4 •  The deprecia&on method of machine Y is changed from the straight-‐line method to the units of produc&on method to beXer reflect use.

36



ACCOUNTING ERRORS THEORY IAS 8 Accoun&ng Policies, Changes in Es&mates and Errors



Errors

• Ommission from OR misstatement in financial statements

38

Mathema&cal mistakes, misapplica&on

of policies, fraud, oversight

Informa&on was available when financial

statements were authorised for issue

Relates to one or more period(s) Failure to use or

misuse of reliable informa&on

Misinterpreta&on of facts/circumstances

that existed



Errors

• Material prior period errors are retrospec&vely corrected in the 1st set of financial statements authorised for issue aier discovery • Restate either: •  Compara&ve amounts for prior period(s) presented in which error occurred

OR

•  Opening balances of assets, liabili&es and equity for earliest period presented (if error occurred before the earliest prior period presented)

39



Correc=on of prior period errors Material?

Correct in current period

Correct prior periods in which error was made

Yes No

3rd SFP required if opening SFP is affected

No disclosure Disclosure If not prac&cable, correct from when it is

Restate opening balances of

compara&ve period if error occurred before

this date



ACCOUNTING ERRORS IAS 8 Class Example



Errors Examples

42

Scenario Error? Yes/No

1 During the annual year-‐end inventory count, a mistake was made in calcula&ng the quan&ty of a certain item.

2 The bookkeeper accidentally captured some invoices with the wrong amounts in the previous year.

3 Co X bought an asset 2 years ago. The VAT was incorrectly accounted for in the financial records.



DISCLOSURES FOR ERRORS IAS 8 Accoun&ng Policies, Changes in Es&mates and Errors



Errors Disclosure

• Nature of prior period error • Amount of correc&on for each prior period presented •  For each line item affected •  For basic and diluted earnings (if IAS 33 Earnings Per Share applicable)

•  Amount of correc&on at beginning of earliest period presented

•  If retrospec&ve restatement imprac&cable, describe such

44

Not repeated in subsequent periods



Illustra=on (basic) – don’t worry about the maths yet

Current year Prior year 1 Prior year 2

Financial Posi7on

Decrease in asset n/a (1,500) (1,000)

Decrease in deferred tax liability n/a 450 300

Net decrease in equity n/a (1,050) (700)

Opening effect on retained earnings (140)

(200 – tax 60)

Financial Performance (Profit or loss)

Decrease in revenue n/a (500) n/a

Decrease in tax expense n/a 150 n/a

Net decrease in profit n/a (350) n/a

45



CORRECTING ACCOUNTING ERRORS IAS 8 Class Example



Example Correc=ng an error

• During 20X4, Co X discovered that prepayments of CU400 made during 20X2 had not been recognised in profit or loss as related expenses were incurred. •  The prepayments should have been recognised as follows: •  20X2 = CU100 expense •  20X3 = CU250 expense •  20X4 = CU50 expense

•  The misstatement is material and assume a tax rate of 28% (and that the expense was tax deduc&ble at the earlier of payment or accrual)

47



Journals – what was recorded

48



Extract from draW 20X4 financial statements before correc=on of error

49

Drai 20X4 20X3 20X2

Extract from statement of profit or loss and comprehensive income

Revenue 6,000 4,000 2,000

Expenses (3,500) (2,600) (1,000)

Profit before tax 2,500 1,400 1000

Tax expense (700) (392) (280)

-‐ Current tax expense (assume only TD is prepayment)

(700) (392) (168)

-‐ Deferred tax expense 0 0 (112)

Net profit aier tax 1,800 1,008 720

20X2 CT exp = 1,000 – 400 = 600 x 28% = 168



Extract from draW 20X4 financial statements before correc=on of error

50

Drai 20X4 20X3 20X2

Extract from statement of financial posi7on

Assets – Prepaid expense 400 400 400

Liabili&es – Deferred Tax Liability 0 0 112

Liabili&es – Current Tax Liability 700 392 168

Extract from statement of changes in equity

Opening retained earnings 11,728 10,720 10,000

Current year net profit 1,800 1,008 720

Closing retained earnings 13,528 11,728 10,720



Journals to correct error 20X2

51




52




53



Example Correc=ng an error

•  Extracts from the notes 8.  During the year Co X discovered that prepayments had

not been recognised in profit or loss as the related expenses were incurred. The prepayments should have been recognised as expenses of CU100 in 2012; CU250 in 2013 and CU50 in 2014. The financial statements of 2013 have been restated to correct this error. The effect of the restatement is summarised below.

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55

20X4 20X3 20X2


Decrease/(increase) in expense n/a (250) n/a

Decrease/(increase) in income tax expense n/a 70 n/a

Increase/(decrease) in profit n/a 180 n/a


Increase/(decrease) in prepaid expense n/a (250) (100)

Decrease/(increase) in deferred tax liability n/a 70 28

Decrease/(increase) in current tax liability n/a 0 0

Increase/(decrease) in equity n/a (180) (72)



Documents

IAS 8 Handout - gimmenotesgimmenotes.co.za/wp-content/uploads/2016/12/FAC3701-su5-ias_8... · Title: IAS 8 Handout.pptx Author: Richard Starkey Created Date: 7/8/2014 4:37:44 AM